Facebook Inc (FB) vaulted past both Exxon Mobil Corporation (XOM) and Berkshire Hathaway Inc. (BRK.B) in market cap yesterday, making Facebook stock the fourth largest stock by market cap trading in the U.S.
This makes Mark Zuckerberg bigger than Warren Buffett.
To me, this is a definite contrarian sign that FB has gotten a little extended at these levels and is ripe for a short-term pullback.
The latest earnings announcement from Facebook was certainly impressive, beating on both the top and bottom lines handily. The FB stock reaction, however, was a little overly impressive. FB is now valued more highly than Berkshire Hathaway, yet Facebook generates roughly 10% of the revenue compared to BRKB.
Yes, FB is growing at a much faster pace than Berkshire, but as Facebook stock gets bigger, the growth rate will necessarily slow as a function of the law of large numbers.
Facebook stock is also extended on a technical basis, with nine-day RSI reaching an overbought reading of 76.05. Previous times that FB stock has exceeded a 70 reading have marked a short-term top for FB stock.
Click to Enlarge Implied volatility (IV) has also come down sharply post-earnings, now trading at the lowest levels since FB stock last peaked on Dec. 29. This is usually a reliable short-term contrary indicator as well.
So while I am not looking for an imminent crash in FB stock, I do feel a short-term pullback is warranted given the magnitude of the recent move in FB stock.
FB Stock Trade
The comparatively low levels of IV and the steep term structure of volatility (short term options trading expensive to longer term options) favor structuring with a put calendar spread.
Click to Enlarge Specifically, I would look to buy the regular monthly FB Feb $113 puts that expire Feb. 19 and sell the weekly FB Feb $113 puts that expire this Friday for a $1.30 net debit. I am able to sell a comparatively expensive 36.76 implied volatility while hedging with a comparatively cheap 30.75 implied volatility. The spread structure also captures some time premium decay.
The spread initially sets up slightly bearishly at a negative 6 deltas and will expand on a move towards the $113 strike price. It also allows for an additional weekly put sale against my long monthly puts to further defray the cost if FB stock closes above the $113 level this Friday.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
